Wednesday, August 26, 2015

Moscow had a Chance to Prevent Oil Price Decline a Year Ago But Didn’t Use It, Inozemtsev Says

Paul
Goble

Staunton, August 26 – From greed,
need, or incompetence, Moscow had a chance to prevent the current slide in oil
prices but failed to make use of it, Vladislav Inozemtsev says, calling into question
all of the Russian media’s suggestions that the decline was the result of
either a Saudi conspiracy against US fracking or a US conspiracy against
Russia.

In yesterday’s “Gazeta,” the Russian
economist says that as oil prices continue to fall and with them the ruble and the
Russian economy, people are casting about for all kinds of explanations; but “no
one is recalling what became the most important trigger” of this trend and
Russia’s involvement in it (gazeta.ru/column/vladislav_inozemcev/7715405.shtml).

In October 2014, Putin was
celebrating his annexation of Crimea and predicting that the world economy
would collapse if oil prices fell below 80 US dollars a barrel. At that time,
oil futures stood at 90 US dollars a barrel, making Putin’s position seem
entirely plausible. But it soon proved not to be.

Shortly thereafter, Inozemtsev
writes, an OPEC summit took place in Vienna at which the parties were scheduled
to discuss cutting production by 1.5 million barrels a day in order to prop up
prices.“The outcome of the debates was
not pre-determined,” he says; and “the summit decided to maintain production at
its former level.”

Many analysts at the time blamed Saudi
Arabia for this because, they argued, Riyadh wanted to undercut US fracking
development. “But were they alone responsible?” Inozemtsev asks, and he
suggests not only were they not but that Russia played a role in the subsequent
collapse of prices, however counter-intuitive that may seem.

At the November 2014 OPEC meeting,
Igor Sechin, the head of Rosneft and a close ally of Vladimir Putin, flew in
and declared, for the first time officially, that that company had “already
reduced production by 25,000 barrels a day and was prepared to discuss its
further reduction.”

That was said on November 26, but on
the following day, OPEC voted to maintain the existing quotas. That meant, as
Bloomberg reported at the time, that Rosneft would maintain production at the
current level even if prices fell below 60 US dollars a barrel, the Moscow
economist says.

“Now, let us consider the
statistics,” Inozemtsev says. OPEC countries were producing 36.6 million
barrels a day in 2014; Russia was producing 10.8 million. “If [Russia] had
wanted to support OPEC in the regulation of prices, it should have suggested
cutting production by 400-450,000 barrels a day and preferably even more,” not
the miserly amount it did.

Nearly a year later, oil prices have
fallen by almost half, and most experts predict that they will decline another
20-25 percent until stabilizing. “The ruble has collapsed to its historic
minimums against the dollar and the euro, and there is no basis to consider
than it will not surpass those in the coming days.”

Why didn’t Moscow do the rational
thing as far as prices were concerned? Inozemtsev asks rhetorically. The answer
lies in the fact that “Rosneft remains the main taxpayer of the country,” and
cutting production would thus reduce the income of the Russian state. But now
because of what it failed to do in October 2014, Moscow faces a much greater
loss of income.

Most analysts think that at the
present time, the amount of oil produced exceeds demand by 1.4 to 1.7 million
barrels a day. That will push prices down further as will the return online of
Iranian production. Prices will thus fall, and Russia, although not an OPEC
member, produces enough to affect prices – or at least it could have a year
ago.

But Russia’s “powers that be haven’t
undertaken any steps capable of influencing the situation.” Instead, “like
lambs before a farmer with a long knife, they have stubbornly hoped for some
miracle which on one fine day will reverse the market trend.”Had Moscow officials acted to prop up oil
prices a year ago, they would have suffered less than they will now.

Were Russia to cut production now,
it would send a signal to OPEC, Inozemtsev says, but that is unlikely: “The
Russian authorities continue to be glad about the growth of production of oil,”
thus ignoring the fundamentals of the market that the Kremlin likes to insist
its denizens are so closely monitoring.